A busy schedule of doctors never slows down for tax season. Because of shortage of time, doctors usually have oversight or outright blunders, which end-up, paying thousands of unnecessary taxes. Due to time constraints, they are unable to make an efficient strategy to save money or sift through every write-off or tax credit.
Doctors are usually high earners. They have to carefully plan their tax breaks so that they can conserve their money and can easily plan for the future. Every doctor needs to avoid tax mistakes so that they can save more for financial goals. Tax mistakes are easily avoidable with only a minimum effort.
Here is the breakdown of six tax mistakes that a doctor should avoid lowering their effective tax rates
1. Lack of contribution in employer-sponsored Retirement Plans
Some physicians usually fail to utilize their employer-sponsored plans. Which results in a higher taxable amount. Doctors can easily reduce their taxable income by maximizing their contribution to their employer-sponsored Retirement Plans. Some common retirement plans like 403(b), 475(b), or 401(k). These Plans are the best strategies to bolster your savings for retirement and reduce your taxable income.
To avoid tax errors, every doctor should take full advantage of available deductions through employer sponsorship programs. Moreover, there are also some contribution Plans offered by some employees which provide free money towards your retirement savings. To have a bigger tent in your tax payment Contribute to more than one employment Plan to have lower tax rates.
2. Overlooking a Health Savings Account
Saving some money for unexpected medical expenses is a great move. Many doctors fail to utilize their health savings account which results in higher tax rates and losing on multiple tax perks.
A Health Savings account offers an advantage for tax savings. The eligibility of HSA is for those physicians who have high deductible health insurance plans. The use of health insurance plans can give doctors many permanent tax breaks perks like
● You can make tax deductibles contributions
● You can enjoy tax-deferred growth
● You can enjoy tax-free distribution while paying medical expenses
To avoid such tax mistakes, doctors need to take full advantage of their health savings account. Many companies are offering accounting services for doctors who are providing complete guidance for choosing health savings accounts.
3. Doctors Neglect 529 tax deduction plan
Doctors usually ignore the benefits of the 529 plan. They mistakenly think that using such a type of savings account can only limit saving on taxes. To have a complete benefit of tax payment, doctors should explore all the deductions of 529 plans. It is a specialized savings account that gives an advantage of tax-free withdrawal for higher education costs. Moreover, such savings plans place no limit on income, age, and yearly contributions.
Doctors who fail to explore the perks of 529 plans result in more taxable income. To avoid such mistakes, physicians need to explore other benefits of the 529 plan and consider investing in it. This will create a tax advantage for your future education expenses.
4. Fail to maintain and claim charitable donations
Doctors usually fail to record and file their charitable donations. By maintaining the records of your philanthropic donations you can easily reduce your taxable income. To have tax savings, doctors need to itemize their charitable donations and claim valuable tax write off.
A proper strategy or plan should be followed to avoid such tax mistakes. Doctors need to follow IRS guidelines for maintaining records. For example, a small number of donations can be verified with a cash receipt, the expensive item may need evidence. Various apps can track and record your donated items. By maintaining records you can easily save from tax payments.
5. Mislabelling their sources of income
One of the common errors made by doctors. Doctors fail to categorize their sources of income strategically. They mislabelled their active and passive income. Money that doctors own from their business practices is coded as active income because there are stricter limits in claiming losses from passive income.
And income generated from the real estate should be listed as passive income because it can allow additional tax relief. To avoid such mistakes, consult with your tax professionals, who offer you the best bookkeeping services for doctors through which you can easily classify your sources of income. By categorizing your earning, you can maximize your tax savings and get Safe from the tax penalty.
6. Neglect Future tax savings investments
Many doctors show negligence in future tax savings that can help in funding their retirement. They usually rely on immediate tax savings programs and this anticipates an account 401 k plan for their retirement withdrawal which they believe will cost a lower tax bracket. However such plans give no guarantee for future tax savings.
To avoid such uncertainty in the future, doctors should take advantage of Backdoor Roth, IRA, and other future benefit plans to bolster their retirement savings. These Plans offer tax-free withdrawal and tax-free growth for retirement. Consult with your tax professionals to get guidance for your retirement plans.
In conclusion
Despite long hours and stressful work, doctors need to pay full attention to their financial obligations. Their negligence in tax payment can lose out their earnings from over taxation. If these mistakes of tax payment are avoided, it can help in undermining your savings and jeopardize your finances.
